Rules changing for payday loans
By Peter Diekmeyer • Bankrate.com

Need a little cash to tide you over until your next pay cheque? If so, chances are you have considered turning to one of the increasing number of payday loan providers -- such as Money Mart, The Cash Store and Mr. Payday -- that are springing up across Canada and on the Net.

A recent report on payday loans by Statistics Canada says these loans appeal mostly to people who are young, have little in savings and no credit card, and whose spending likely exceeds their income.

Such loans don't come cheap. "When annualized, the interest rates and other fees charged for borrowing $100 for 14 days can range from 335 percent to 650 percent -- rates that exceed the criminal interest provisions of the Criminal Code," writes Wendy Pyper, an analyst with Statistics Canada.

Furthermore, writes Pyper, "concerns have been raised about questionable practices in the industry, including high borrowing costs, insufficient disclosure or contract terms and unfair collection practices."

As a result of the high fees and other reported abuses, the payday loan industry is coming under increasing public scrutiny. Three of the nine Canadian provinces that allow payday loans (Quebec does not allow them) have already passed legislation that puts limits on the industry. Bills have also been introduced in boh British Columbia and Ontario, where public consultations will be held to see what further measures might need to be taken.

How payday loans work
Payday loans are basically short-term loans that, as the name implies, are designed to enable a borrower to cover short-term expenses until the borrower's pay cheque comes in. The Statistics Canada survey indicates these loans are usually for between $100 and $1,000, averaging about $280.

To get such a loan, borrower usually must produce documents proving they get a regular pay cheque and have a bank account. In return for the cash, the borrower writes a cheque for the loan plus the fees and interest, dated for the day he deposits his pay.

The industry has sprung up from practically out of nowhere, growing from only a few stores during the 1990s to more than 1,000 today. Estimates of the number of Canadians that used the service last year run as high as 2 million.

While the fees charged for payday loans vary, theFinancial Consumer Agency of Canada estimates the cost of a typical $300 loan taken for 14 days is $50, which works out to an annualized rate of 435 percent. That's far higher than the 36 percent charged by a typical credit card or the 21 percent charged for overdraft protection on a bank account.